Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 795Hart’s proposal that the basis of the reform consist of simplygiving banks the sum of the bills they need to reach a 100-percent reserve ratio is a bitter pill to swallow. This methodwould make the total of private banks’ current assets unnecessaryin the account books as backing for deposits, andhence, from an accounting viewpoint, they would automaticallycome to be considered the property of banks’ stockholders.Murray N. Rothbard has also advocated this solution, 100books, loans created ex nihilo square with deposits also created ex nihiloconceals a fundamental economic reality from the general public:deposits are ultimately money which is never withdrawn from thebank, and banks’ assets constitute a body of great wealth expropriatedfrom all of the rest of society, from which banking institutions and theirstockholders exclusively profit. Curiously, bankers themselves havecome to recognize this fact implicitly or explicitly, as Karl Marx states:So far as the Bank issues notes, which are not covered by themetal reserve in its vaults, it creates symbols of value, that formnot only currency, but also additional, even if fictitious, capital forit to the nominal amount of these unprotected notes. And thisadditional capital yields an additional profit for it.—In B.A.1857, Wilson asks Newmarch, No. 1563: “The circulation of abank’s own notes, that is, on an average the amount remainingin the hands of the public, forms an addition to the effectivecapital of that bank, does it not?”—“Assuredly.”—1564.“All profits, then, which the bank derives from this circulation,is a profit arising from credit, not from a capital actuallyowned by it?”—“Assuredly.” (p. 637; italics added)Thus Marx concludes:[B]anks create credit and capital, 1) by the issue of their ownnotes, 2) by writing out drafts on London running as long as21 days but paid to them in cash immediately on being written,and 3) by paying out discounted bills of exchange, whichare endowed with credit primarily and essentially byendorsement through the bank, at least for the local district.(Karl Marx, Capital: A Critique of Political Economy, vol. 3, p.638; italics added)100 On the transition to a 100-percent reserve requirement, see Rothbard,The Mystery of Banking, pp. 249–69. In general we agree with the transitionprogram formulated by Rothbard. However we object to the gift heplans for banks, a contribution which would allow them to keep theassets they have historically expropriated from society. In our opinion,it would be perfectly justifiable to use these assets toward the other ends